Secular stagnation has become a very hot topic lately and quite rightly so. In this short post I ‘d like to point to a graph reflecting these stagnation dynamics for the periphery. It is a simple sum of the working age population (people 15-64 years old) and the capital stock for Greece, Portugal, Spain and Italy with 1961 as the base year:
It is quite clear that the Euro periphery working age population reached a peak during 2009 and is now on a secular decline trend (it is projected to lose almost 2% by 2015 according to Ameco). The capital stock has also stopped its increase since 2011, remaining roughly stable during 2011 – 2015. Regardless of the assumed production function these dynamics can only point to much lower potential product and growth for the medium-term future. Taking into account the large numbers of the long-term unemployed (who face large risks of becoming unemployable) the Euro periphery faces a difficult future of lower potential product which can only reduce the amount of (private and public) debt that can be serviced without further affecting output growth (through higher savings and lower credit ratings).
The graph also points to the underlying reason for adopting the current crisis resolution policy which mainly consists of reducing labor bargaining power and wages. Since after 2009 labor would have become the ‘scarce factor of production’, lowering labor compensation and ability to demand wage increases is a powerful way of maintaining the profit share in output. The question of course is whether such a policy is enough to accomplish a ‘profit-led’ growth model for the periphery countries.
The ‘outlier’ of this policy is Greece which is the only country where real compensation has seen a truly dramatic fall since the start of the crisis:
Real compensation per employee is now on its way to return to 1995 levels! This dynamic can help explain why the fall in output was so dramatic in the Greek case while it also casts a doubt on strong recovery scenarios, especially taking into account the large unemployment spell and the stock of outstanding private debt in the country (and the NPLs that it creates in bank balance sheets).